Got debt? Milk giant downgraded

The finances of Dairy Farmers of America are souring faster than cream in a July sun, according to a May 9 Moody’s Investors Service report.
The giant, farmer-owned dairy cooperative marketed 33 percent of the nation’s fluid milk last year.
Even worse, at least for its 22,000 dairy farmer members, is that the service said the best strategy to clean up the mess is conserving cash for DFA to “restrict payments to members in order to conserve cash for debt service.”
Great. It’s another Kansas City-based agriculture cooperative – recall Farmland Industries? – whose farmer-members now face the likelihood of paying off big debts gained by their big-dreaming, big-spending hired hands.
It’s a familiar hymn – an all-too-familiar, sad hymn – these days.
Farmers form a cooperative to gain marketing power. Success brings size. Size brings “professional” managers and, before long, the pros convince members to move into areas where members have no ability or interest – usually processing.
Then come mergers, bond offerings, maybe a legal tangle, more debt, a market reversal or two, and pretty soon you have a Moody’s report warning the world of “a decreased likelihood that investors will receive their principle and interest in full and on time.”
In a nutshell, that’s the cooperative’s short story.
Cooperative history. DFA’s birth in early 1998 had few merits other than scale.
Three of its four merging members, Milk Marketing Inc., Western, and a large portion of AMPI, brought more debt into the deal than dollars.
Its fourth and biggest player, MidAm, and MidAm’s charismatic leader, Gary Hanman, predicted the cooperative would be a dairy superstar.
With control over one-fifth of the nation’s fluid milk, Hanman envisioned the cooperative as a national and international powerhouse in milk marketing, processing and exporting.
Hanman’s dream became a reality because Hanman became the DFA’s boss.
Bad moves. Since 1998, the cooperative has used joint ventures, vertical integration, buyouts and, said the U.S. Department of Justice, a tangle of questionable tactics to become the dominant U.S. milk seller and a major player in the cheese market.
The maneuvering, however, never brought the promised profits.
According to Peter Hardin, editor and publisher of The Milkweed, a monthly dairy marketing report, the big co-op was “built on a cracked foundation.”
“When times are good for its dairy farmers,” as in the past two years with record or near-record milk prices, explained Hardin, “DFA’s processing subsidiaries can’t make money. To make money, DFA needs low milk prices because DFA is really a processor.”
“Low milk prices, though, are exactly what the farmers don’t want,” said Hardin. “In essence, DFA is competing against DFA.”
Moody’s May 9 report concurs:
“(A)s DFA’s investments in bottling affiliates have increased and its branded dairy foods business has grown, its earnings have become . . . negatively impacted . . . hence lower core earnings.”
Recent market moves by the cooperative only added to its woes.
In 2004, DFA bought hundreds of tons of cheese on the open market to hedge against what it believed would be higher milk prices, the key cost to its cheese plants.
The trouble was, notes Moody’s: “When prices for those materials fell, DFA incurred large inventory losses. This event not only highlighted the increased price risk that DFA’s business now faces, but also the cooperative’s poor risk management and hedging ability.”
Bad ending? The blunder reminds Hardin of Hollywood.
“You’ve heard of the movie, The Gang that Couldn’t Shoot Straight. DFA is ‘The Gang that Can’t Milk a Cow Straight.'”
Straight or otherwise, DFA’s troubles may compound before they climax.
According to published reports, the U.S. Department of Justice’s Antitrust Division is investigating allegations that the cooperative used its market clout to influence raw milk prices – push prices lower, claim affected farmers – in regions around the nation.
Should the cooperative’s financial cheese thicken, its members may take the biggest hit, notes Moody’s, because the cooperative’s, “bylaws dictate that payments to third party creditors, including debt service, have seniority over payments to members for milk.”
That ending also sounds familiar.
Just ask Farmland Industries members.
(Alan Guebert’s Farm and Food File is published weekly in more than 75 newspapers in North America. He can be contacted at agcomm@sbcglobal.net.)